The Russian insurance market: on the brink
26.10.2011 — Analysis
2012 could be the goodbye year for a third of the insurance companies in Russia. New legislation requires them to increase their capital stock, but a second wave of the financial crisis is threatening them with a decline in earnings. In 2009, at the height of the financial crisis, 101 insurers left the market, but next year twice as many companies could lose their licenses. This correspondent from RusBusinessNews has tried to determine which ones will survive this "financial turbulence".
As of Jan. 1, 2012, general insurance companies will be required to increase their capital stock by 400% - up to 120 million rubles. A minimum of 480 million in capital stock will be required for companies that provide both insurance and reinsurance. The minimum for life insurance companies will be 240 million rubles. The companies that will be least affected are those operating in the compulsory medical insurance market, which will only be required to double their capital stock - from 30 to 60 million rubles.
An analysis conducted in mid-2011 demonstrated that about 75% of insurance companies were not yet in compliance with the new demands. Their capital stock fell short by a total of 54.3 billion rubles.
The situation improved somewhat in August - Aleksandr Koval, the head of Rosstrakhnadzor, told journalists that between 360 and 380 of the 600 companies operating in Russia did not possess the required capital stock. "I think a couple of hundred of them might leave the market by the end of the year", he announced.
Right now, those insurance companies that have "fallen behind" are trying different ways to increase their capital. "Some of them are issuing additional shares, some are merging, and some are trying to find someone to buy them. But it's hard to say exactly how many companies are already prepared for the transition in 2012. Probably one should start with Rosstrakhnadzor's data", Vyacheslav Tarasov, the head of the Insurance Inspectorate for the Urals federal district, told RusBusinessNews.
Oleg Tsypulin, the director of the Urals federal district office of the Russian Union of Auto Insurers, said that 25 insurance companies to date have expressed their intention to increase their capital stock. Nine companies have decided to leave the field of reinsurance. But these numbers seem insignificant compared to the overall situation.
According to Kirill Seleznev, the deputy director of affiliate sales for ROSGOSSTRAKH, LLC's branch in the Sverdlovsk region, insurance companies that cannot meet the new capital requirements have several fairly profitable ways to leave the market. "First of all, they can "requalify" as insurance brokers, using their network of agents, affiliates, and offices. The past few years shows us that this is most common way this scenario plays out. The second method is to be sold to or to merge with a larger insurance company. There's no question that companies with a balanced market insurance portfolio, transparent reporting, and qualified staff will be attractive to the major market players", he notes.
Olga Sigalovich, the general director of Eastern Insurance and Reinsurance Company (EIRC, OJSC), told RusBusinessNews that many companies that are unable to meet the new requirements regarding capital stock announced back in the summer of 2011 that they were leaving the market and transferring their portfolios, and companies that decided to merge took that step by midyear. "An announcement was made by the end of the second quarter that Nakhodka Re was merging with the TIT insurance company. Eastern Insurance and Reinsurance Company completed the merger between Eastern Reinsurance Company and Megapolis in the first quarter of the year", says Olga Sigalovich.
The big national insurance companies can only benefit from this situation, since the ongoing trend toward a monopolized market will mean that that share of the market will be reallocated to the stronger players. "Customers of insurers that are leaving the market are going to choose the most reliable of the remaining companies, which are those ranked in the top ten or top twenty", believes Kirill Seleznev.
Aleksei Semenikhin, the general director of the state insurance company Yugoria, fully agrees with him. According to him, the trend toward a consolidated market has been going on for several years: every year 8-10% of all insurance companies leave the market. This process will accelerate in 2012 - approximately 25-30% of insurance companies will say goodbye. "Based on the results from the first half of 2011, the top fifty insurers received 85% of the premiums that were paid, and 93% went to the top one hundred companies. Companies that cannot meet the legislative demands for capital stock have only an insignificant share of the market and most aren't in the top fifty or even the top one hundred. What's more, as a rule they usually aren't actively increasing the retail insurance side of their business and do not work with private individuals. Their share of the market will end up being reallocated, and all the active players on the insurance market will have the chance to compete for this segment", thinks Aleksei Semenikhin.
Lessons in how to survive a crisis
Besides the demands to increase capital stock, the insurance market might just collapse under the weight of the financial crisis. Many experts predict the next wave of trouble will arrive in the last quarter of 2011 or the beginning of 2012. The current global economic situation is hardly stable. Europe is mired in foreign debt and the US is also experiencing financial distress. Experts feel that even Russian insurance companies could be shaken by aftershocks from the crisis.
According to Kirill Seleznev, Russian companies primarily have their cash reserves deposited in Russian banks or Russian securities. "No one has invested in Greek, Portuguese, or Irish debt, or in US equity or financial instruments. So a European default or a downgrade of the long-term US credit rating would not directly affect the solvency of Russian insurance companies. But the "troubles" on the global stock markets and financial markets are resulting in a decrease in the Russian Central Bank's gold reserves and a corresponding decline in the money supply in the Russian economy. This results in an actual decrease in income for the companies and individuals who are customers of the insurance companies. When insurers don't get those premiums, their earnings decrease", notes Kirill Seleznev.
He feels that the main task for any insurance company during a financial crisis is to make its business more profitable. The profitability of most Russian companies is currently largely dependent on transactions in the auto insurance market: both comprehensive and mandatory liability auto insurance. These types of insurance make up more than half of the portfolio of the biggest Russian insurance companies. But Kirill Seleznev thinks that it is essential to create a single database of insured events, if this segment is to be made more lucrative. "A database like this would allow companies to work objectively to establish rates for mandatory liability insurance and comprehensive auto insurance, which would stop unprofitable customers from jumping from company to company each year. It would also significantly decrease losses from fraud, which are currently estimated at 20% of the total of all insurance payouts. In addition, the presence and establishment of an "insurance history" would force many customers to be more responsible about demanding a payout. They would only turn to their insurance company if a lot of money was involved, not just for a scratched bumper", notes Kirill Seleznev.
Olga Sigalovich, the general director of EIRC is convinced that in order to survive a difficult financial crisis, insurers need to enlist the support of stockholders and continue to optimize their costs. "It's also important to pay attention to one's portfolio, to diversify risks, and of course seek out new categories of customers. Finding a new insurance niche helps create an additional cushion of safety", she notes.
Caution above all
Insurance companies' customers could suffer as a result of the looming financial crisis and the tougher requirements for insurers. Aleksandr Koval, the director of Rosstrakhnadzor, has often warned that many smaller firms are expanding their auto insurance portfolios (mandatory liability and comprehensive insurance) too rapidly. He feels there is a good chance that unscrupulous insurance companies might simple run off with the money.
Which brings up the point that by the end of 2009, at the height of the financial crisis, the Russian Union of Auto Insurers paid out 3.2 billion rubles to cover the mandatory liability insurance claims of customers of bankrupt companies. Oleg Tsypulin, the head of the Urals federal district office of the Russian Union of Auto Insurers, hopes that the union won't be faced with such a massive payout in 2012. "The liabilities of insurers that need to bring their capital stock into compliance with the regulations are estimated to be no more than 3.5 billion rubles. And the union has 6.4 billion rubles in its compensation payout fund", he explained.
But legal entities and private individuals who have insured their property and cars with comprehensive auto insurance or third-party liability insurance could really suffer. Vyacheslav Tarasov, the head of the Insurance Inspectorate for the Urals federal district, warns that those policy holders will be left with nothing if their insurance company goes bankrupt. "We can only warn customers to pay attention to what's going on at their company. If it's clear that that insurer cannot meet the obligation to increase its capital stock, then customers shouldn't sign a contract for next year", he advises.
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